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The Big ShortMichael LewisMichael LewisReviewed by Kathy Hare

Not everyone thought housing prices would increase forever. In fact,
some were certain prices would plummet and foreclosure rates would spike
to historic levels. So they placed huge bets against the entire mortgage
industry. Now that certainly sounds un-American, doesn’t it?
Unfortunately, these are actually the good guys in Michael Lewis’ latest
non-fiction endeavor, “The Big Short.”

If you want to make sense of the corruption that fueled the housing
bubble and the fraud that kept it booming, “The Big Short” is a good
place to start. But it’s just that – a start - and a somewhat biased one
at that. More on those points later, first let’s examine what’s good
about this book.

Economics is not my favorite reading material, so whenever I’m going
to tackle the subject, I begin by turning to the middle of the book.
Most authors can hold a reader’s interest in Chapter 1, but few economic
writers can keep my eyelids open for long. So if I can get through a few
pages smack-drab in the middle without falling asleep, it’s because the
book was written by a highly skilled author. And the “Big Short” was so
engrossing that I made it from the prologue to the acknowledgments
without even a yawn.

Lewis reveals the dirty deeds behind the big crash through the eyes
of three private investment firms, and Gregg Lippmann, a bond salesman
at Deutsche bank. All had one thing in common – a desire to become
filthy rich by “shorting” the mortgage bond market.

Meet Steve Eisman, an arrogant Wall Streeter who doesn’t have the
social graces to order lunch without offending someone. He is the
essential character in this work; the one Lewis zeros in on, and I
suspect Eisman acted as a channel for Lewis’ personal opinions about the
housing debacle. But then it was Eisman who first called the subprime
mortgage market “nothing more than a Ponzi scheme” back in the
1990’s.Then subprime mortgages were issued by institutions such as
Household Finance, under the guise of helping the “little guy,” and only
represented two percent of all mortgages issued. By 2006, 80 percent of
all mortgages were subprime ilk.

Subprime mortgages are a big risk for the mortgage holders because
the instruments are issued to home buyers with less-than-stellar credit
ratings, and with little to no down payment required. Each mortgage
comes with a flexible interest rate that starts off low, but zooms
higher than traditional 30 year fixed-rate mortgages after three years.

But buyers had little “skin” in the loans, and many believed they
would refinance before the higher rates kicked in. Loan originators and
mortgage bond brokers received bonuses for bringing in these buyers, so
the subprime default rates meant nothing to them.

Mike Burry took notice when bond brokers began bundling subprime
mortgages into packages, to sell to other financial agencies as
“Collateralized Debt Obligation,” commonly known as CDO’s. That was in
2003. Burry has the ability to look at complicated financial documents
and see what others might miss. CDO’s are supposed to be “asset-backed
securities,” but when Burry examined individual mortgages in the
package, he realized the loans represented a worthless pile of paper. So
he began urgently searching for a way to bet against the entire CDO
market.

In 2005, Goldman Sachs gladly helped him; the instrument was called a
“credit default swap.” CDS buyers select CDO’s to bet against but only
collect when mortgages in CDO’s default. So Burry selected the riskiest
CDO’s and purchased his CDS chips. Lewis writes, “If Mike Burry made
$100 million when the subprime mortgage bond he handpicked defaulted,
someone else must have lost $100 million." But since Goldman Sachs
didn’t want to take the risk of Burry winning, they passed that on to
AIG, who collected premiums from Burry for years, until his bets paid
off.

Unfortunately, Burry’s economic skills came part and parcel with
Asperger’s Syndrome, which handicapped his ability to share his
knowledge with investors. But the man with autism is the only person in
“The Big Short” who actually fits Lewis’ “hero role.” He is purely a
numbers man, and the numbers clearly didn’t add up.

It wasn’t until the mortgage greed fest really got cooking that
“Cornwall Capital” entered the picture. The Cornwall guys appeared to be
bumbling idiots, so the banking brains disparagingly nicknamed the firm
“Cornhole.” But they were smart enough to realize the entire system was
riddled with corruption, so idiots or not, they too placed their bets -
courtesy of Bear Stearns.

Finally there’s Gregg Lippmann, the most dubious character among the
good guys. I can’t seem to disassociate him from the adjective “sleazy.”
He played both sides of the fence, first earning commissions from
Germany’s Deutsche Bank to off-load CDO’s to other institutions, then
placing a billion dollars of bets against the bond markets.

Lewis explains how the gaggle of risky “Triple B” mortgage bonds
suddenly became extremely low risk “Triple A” bonds overnight. Moody’s
and Standard & Poor’s just waved a magic wand. Next, when the demand for
subprime mortgages ended, the industry committed its most nefarious act
and invented bogus mortgages, put them in bundles, and sold them off to
unsuspecting foreign banks such as UBS. And when that didn’t generate
enough cash to cover the fraud, the “big guys” joined Lewis’ “good guys”
and placed their own bets against the system.

Ironically, those bets are what kept the system afloat from 2006
until 2008, when it all came tumbling down. Read how Merrill Lynch,
Lehman Brothers and Bear Stearns met their Waterloo. But Lewis fails to
tell readers why Goldman Sachs, Citigroup, Morgan Stanley, and other
“rescued” financial firms weren’t allowed to die along with the others.

While this is a fascinating book, “The Big Short” has one big
shortfall. Lewis hardly mentions Fannie Mae and Freddie Mac, the
government agencies that blessed the entire fiasco. By the height of the
housing bubble, a non-English-speaking strawberry picker making $14,000
a year received a mortgage for a $749,000 home. And the Jamaican nanny
who cared for Eisman’s children managed to buy five properties. Their
stories are similar to millions of others who purchased mortgages they
couldn’t afford. And that would have been impossible without Fannie and
Freddie.

Lewis wraps up “The Big Short” with Eisman wailing “Wall Street owns
the government,” but I was left with a big unanswered question. Exactly
what government officials gave Wall Street a free-pass to steal $1
trillion of Americans’ worth?

Read “The Big Short,” because no other author has written a better
first-half of the story.